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Another Money Rule...

Further to my post about a suggestion about how much to spend on a car, I'd like to introduce another guideline if you want to become richer / financially independent etc.

We're all familiar with the expressions about the rich getting richer, but why is this? Primarily, it's because the rich (assuming they worked their way there rather than simply inheriting / winning it) know that money can make more money. This is the "secret" to money and understanding it as a tool.

I introduced the idea of assets and liabilities in a previous post. Remember than an asset is something that earns you money, like a savings account, and a liability is something that costs you money, like a loan or credit card.

If you truly want to get richer, you will want to have at least 75% of your Net Worth in assets.

Importantly, they must be assets that pay you money, not things like "stuff" or a car. Perhaps most importantly of all, and very much misunderstood by many, is that a house does not count as an asset in this way if you need that house to live in. Think about it. The only time you can benefit from the value stored in your home (remembering also that the bank probably owns the majority of it!) is when you sell it. But this leaves you with the issue of needing somewhere to live... The whole time you are actually living in your home, it is merely a savings account that you are gradually building up, but you cannot withdraw money from it (unless you sell it back to the bank in schemes such as equity release, or borrow more money from the bank using your home as security for the loan). In addition, the house costs you money to maintain.

So what should the 75% consist of? Things that pay you to own them - cash, shares, bonds, property (assuming you don't need to live in it!), pensions, businesses etc.

Let's take a look at how the average UK family's wealth is allocated (source:ONS as usual):

Ouch. Looks like most people assume that their house is the best investment. Sure, assuming they sell it when they retire and downsize to a bungalow, this will release some cash. Alternatively, they can sell it back to the bank in the aforementioned equity-release schemes. But what about their next of kin? Who wants the banks to benefit from a lifetime of paying off the mortgage?

The pension and savings are far too low to sustain any more than an average retirement. i.e. holiday once per year, that sort of thing. I sure don't want something like that. I want to travel the world, continue to learn, help others, perhaps in developing countries. £15k per year and a 3 bed bungalow doesn't sound like much fun...

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About PoundCounter

Frustrated with the confusing information out there about health and personal finance?If there's one thing that most diet companies and banks are all too eager to help you lose, it's the pounds in your pocket rather than the pounds on your waist.I aim to provide the tools and information to help with both.